TMCI US Equity☆

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes thereto included elsewhere in this Annual Report. This discussion and other parts of this Annual Report contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled "Risk Factors." Please also see the section titled "Special Note Regarding Forward-Looking Statements."

Overview

We are a medical technology company with the goal of advancing the standard of care for the surgical management of bunion and related midfoot deformities. We have pioneered our proprietary Lapiplasty 3D Bunion Correction System—a combination of instruments, implants and surgical methods designed to surgically correct all three planes of the bunion deformity and secure the unstable joint, addressing the root cause of the bunion and helping patients get back to their active lifestyles. Although bunions are deformities typically caused by an unstable joint in the middle of the foot that leads to a three-dimensional ("3D") misalignment in the foot's anatomical structure, the majority of traditional surgical approaches focus on correcting the deformity from a two-dimensional ("2D") perspective and therefore fail to address the root cause of the disorder. To effectively restore the normal anatomy of bunion patients and improve clinical outcomes, we believe addressing the root cause of the bunion is critical and have developed the Lapiplasty System to correct the deformity across all three anatomic dimensions. Our other products often used in conjunction with bunion surgery include the Adductoplasty System, the Hammertoe PEEK Fixation System, the SpeedPlate Rapid Compression Implant System, and specialized osteotomes and release instruments.

We were formed in 2013, and since receiving 510(k) clearance for the Lapiplasty System in March 2015, we have sold more than 90,000 Lapiplasty Procedure kits in the United States. We market and sell our Lapiplasty Systems to physicians, surgeons, ambulatory surgery centers and hospitals. The Lapiplasty Procedure can be performed in either hospital outpatient or ambulatory surgery centers settings, and utilizes existing, well-established reimbursement codes. We currently market and sell the Lapiplasty System and other products through a combination of a direct employee sales force and independent sales agencies across 249 territories in the United States. As of December 31, 2023, we had 227 direct sales representatives and 22 independent sales agencies. In 2023, employee sales representatives generated approximately 81% of revenues while approximately 19% of revenues came through independent sales agencies.

On February 10, 2023, we completed a follow-on public offering of 5,476,190 shares of our common stock, which included the exercise in full of the underwriters' option to purchase additional shares, at a price to the public of $21.00 per share. This offering resulted in net proceeds of approximately $107.5 million after deducting underwriting discounts and commissions of $6.9 million and offering expenses payable by us of approximately $0.6 million.

On June 12, 2023, we acquired certain assets of RPM-3D used in providing pre-operative planning and patient-specific guides for the surgical correction of foot and ankle deformities for $20.0 million in cash. In addition, we are obligated to pay additional amounts of up to $10.0 million in cash upon completion of certain milestones. This acquisition adds FDA-cleared patient specific instrumentation ("PSI") technologies and capabilities to our portfolio, building upon our pioneering 3D bunion correction and related midfoot solutions, as well as 22 additional patent applications that further expand and reinforce our global intellectual property portfolio covering technologies for the correction of bunion and related deformities.

As of December 31, 2023, we had cash and cash equivalents of $13.0 million and marketable securities of $110.2 million available for sale to fund operations, an accumulated deficit of $134.2 million and $54.0 million of principal outstanding under our term loan and revolving loan agreements.

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Economic Environment

There is continuing uncertainty in the macro-economic environment. Inflationary pressures, interest rates, recession fears and reduced consumer confidence, and ongoing supply chain challenges have resulted, and may continue to result, in higher costs and longer lead times from suppliers and potentially reduced demand for our Lapiplasty Procedure kits and other products. General economic conditions may also negatively impact demand for elective surgeries. While we continuously work with suppliers to mitigate higher costs and longer lead times and continue to invest in our direct sales channel, patient education initiatives, clinical evidence and product innovations to build demand for our products, we expect these macro-economic challenges to continue for the foreseeable future, which likely will impact our results of operations.

Key Business Metrics

We regularly review a number of operating and financial metrics, including the number of Lapiplasty Procedure kits sold, blended average revenue per Lapiplasty Procedure kit sold, the number of active surgeons using the Lapiplasty System and the surgeon utilization rate, to evaluate our business, measure our performance, identify trends affecting our business, formulate our business plans and make strategic decisions. The number of Lapiplasty Procedure kits sold during the twelve months ended December 31, 2023 increased by 5,019, or 20%, over the twelve months ended December 31, 2022. The blended average sales price per Lapiplasty Procedure kits sold was $6,306 during the twelve months ended December 31, 2023, a 10% increase over the same period in 2022. We define the blended average sales price as revenue divided by Lapiplasty Procedure kit sold that includes the revenue for all products sold from our expanding product line. The number of active surgeons as of December 31, 2023 was 2,855, an increase of 20% from the prior year. We define the number of active surgeons as the number of surgeons that performed at least one procedure using the Lapiplasty System in the trailing twelve-month period. The surgeon utilization rate for the twelve months ended December 31, 2023 increased 0.6% over the twelve months ended December 31, 2022 to an average of 10.4 Lapiplasty Procedure kits per active surgeon.

We believe that the number of Lapiplasty Procedure kits sold, blended average revenue per Lapiplasty Procedure kit sold, number of active surgeons using the Lapiplasty System and the surgeon utilization rate are useful indicators of our ability to drive adoption of the Lapiplasty System and generate revenue and are helpful in tracking the progress of our business. While we believe these metrics are representative of our current business, we anticipate these metrics may be substituted by additional or different metrics as our business grows.

Factors Affecting Our Business

We believe that our financial performance has been and in the foreseeable future, will continue to depend on many factors, including macro-economic conditions as described above, those described below, those noted in the section titled "Special Note Regarding Forward-Looking Statements" and in the section titled "Risk Factors".

Adoption of the Lapiplasty System

The growth of our business depends on our ability to gain broader acceptance of the Lapiplasty System by successfully marketing and distributing the Lapiplasty System and ancillary products. We currently have approval at over 2,200 facilities across the United States and plan to continue to increase access by marketing to more surgeons and facility administrators that our products are alternatives to traditional products used in bunion surgical procedures. While surgeon adoption of the Lapiplasty Procedure remains critical to supporting procedure growth, hospital and ambulatory surgery center facility approvals are necessary for both existing and future surgeon customers to access our products. To facilitate greater access to our products and support future sales growth, we intend to continue educating hospitals and facility administrators on the differentiated benefits associated with the Lapiplasty System, supported by our robust portfolio of clinical data. If we are unable to successfully continue to commercialize our Lapiplasty System, we may not be able to generate sufficient revenue to achieve or sustain profitability. In the near term, we expect we will continue to operate at a loss, and we anticipate we will finance our operations principally through the use of our cash and cash equivalents, marketable securities, and expected revenues. We may also raise funds by incurring debt and through offerings of our capital stock.

Investments in Innovation and Growth

We expect to continue to focus on long-term revenue growth through investments in our business. In sales and marketing, we are dedicating meaningful resources to continue to expand our sales force and management team in the United States, as well as our patient focused outreach and education campaigns. We have approximately 340 employee sales representatives, associate sales representatives, clinical specialists, and sales managers at December 31, 2023. We plan to grow this specialized team in 2024 to ensure strong surgeon support and continued market penetration.

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In research and development, our team and surgeon consultants are continually working on next-generation innovations for the surgical correction of bunions and other conditions that often present with bunions. In 2021, we launched (1) the Lapiplasty Mini-Incision System, which is designed to allow the Lapiplasty Procedure to be performed through a miniature, 3.5cm incision as compared to the current 6cm to 8cm incision, and (2) the Adductoplasty System, which brings together our implants and instrumentation to provide a comprehensive system designed for reproducible realignment, stabilization, and fusion of the midfoot to address midfoot deformities that can occur in up to 30% of bunion patients. In 2022, we introduced (1) the 3-n-1 Guide, which combines three separate instruments and three procedure steps into one instrument and step, (2) the S4A plating system, which features advanced 3D contours designed to accommodate variations in patient anatomy, and (3) the SpeedRelease Instrument, which is a single-use instrument designed to make a challenging soft tissue release performed in the majority of Lapiplasty cases easier to perform and more reproducible for the surgeon. In 2023, in addition to the acquisition of the assets of RPM-3D discussed above, we began the market release of (1) the SpeedPlate fixation platform, which can be used in the Lapiplasty and Adductoplasty Procedures, as well as other common bone fusion procedures of the foot, (2) the Hammertoe PEEK Fixation System designed to address hammertoe, claw toe and mallet toe deformities, which often present concomitantly with bunions, and (3) LapiTome and RazorTome Osteotomes, which are sterile, single-use instruments that are designed to facilitate more efficient removal and release of bone slices and soft tissue in Lapiplasty and Adductoplasty cases.

In our general and administrative functions, we expect to continue to hire personnel and expand our infrastructure to both drive and support our anticipated growth and operations as a public company. Accordingly, in the near term, we expect to have net losses from these activities, but in the longer term we anticipate they will positively impact our business and results of operations.

Seasonality

We have experienced and expect to continue to experience seasonality in our business, with higher sales volumes in the fourth calendar quarter, historically accounting for approximately 30 to 40% of full year revenues, and lower sales volumes in the subsequent first calendar quarter. Our sales volumes in the fourth quarter tend to be higher as many patients elect to have surgery after meeting their annual deductible and having time to recover over the winter holidays. Our sales volumes in subsequent first calendar quarters also tend to be lower as a result of adverse weather and by resetting annual patient healthcare insurance plan deductibles, both of which may cause patients to delay elective procedures; however, in some years the first quarter may benefit from additional sales volumes when high patient demand for surgeries in the fourth quarter cannot be fully accommodated and those surgical procedures are rolled over into the first quarter. Similar to the rest of the orthopaedic industry, we have experienced and expect to continue to experience lower sales volumes in the third quarter than throughout the rest of the year as elective procedures generally decline during the summer months.

Coverage and Reimbursement

Hospitals, ambulatory surgery centers and surgeons that purchase or use our products generally rely on third-party payors to reimburse for all or part of the costs and fees associated with procedures using our products. As a result, sales of our products depend, in part, on the extent to which the procedures using our products are covered by third-party payors, including government programs such as Medicare and Medicaid, private insurance plans and managed care programs. Based on historical claims data from 2017, approximately 63% of Lapidus cases and 60% of all bunion surgical cases were paid by private payors.

Medicare payment rates to hospital outpatient departments are set under the Medicare hospital outpatient prospective payment system, which groups clinically similar hospital outpatient procedures and services with similar costs to ambulatory payment classifications ("APCs"). Each APC is assigned a single lump sum payment rate, which includes payment for the primary procedure as well as any integral, ancillary, and adjunctive services. The primary CPT codes for the Lapiplasty Procedure, CPT 28297 and CPT 28740, are grouped together under APC 5114. For Lapiplasty Procedures in which fusion is performed on multiple TMT joints, CPT 28730 applies and is classified under APC 5115. For Adductoplasty Procedures in which fusion is performed on multiple TMT joints, either CPT 28730 or CPT 27835 applies and are classified under APC 5115.

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Components of Our Results of Operations

Revenue

We currently generate revenue from the sale of our proprietary Lapiplasty System and the minimally invasive variations, Adductoplasty System, Hammertoe PEEK Fixation System, SpeedPlate Implant Fixation Platform, single use osteotomes and release instruments, and other ancillary products. These systems bring together single-use implant kits, reusable instrument trays, and surgical techniques. We sell the kits and single use instruments and other products to physicians, surgeons, hospitals and ambulatory surgery centers in the United States through a network of employee sales representatives and independent sales agencies.

No single customer accounted for 10% or more of our revenue during 2023. We expect our revenue to increase in absolute dollars in the foreseeable future as we expand our product offerings, sales territories, new accounts and trained physician base and as existing physician customers perform more Lapiplasty Procedures, though it may fluctuate from quarter to quarter due to a variety of factors, including seasonality and the macro-economic environment.

Cost of Goods Sold

Cost of goods sold consists primarily of costs for the purchase of our products from third-party manufacturers. Direct costs from our third-party manufacturers include costs for raw materials plus the markup for the assembly of the components. Cost of goods sold also includes royalties, allocated overhead for indirect labor, certain direct costs such as those incurred for shipping our products, and personnel costs. We expense all inventory provisions for excess, obsolete and field losses as cost of goods sold. We record adjustments to our inventory valuation for estimated excess, obsolete and non-sellable inventories based on assumptions about future demand, past usage, changes to manufacturing processes and overall market conditions. We expect our cost of goods sold to increase in absolute dollars in the foreseeable future to the extent more of our products are sold, though it may fluctuate from quarter to quarter.

Gross Profit and Gross Margin

We calculate gross profit as revenue less cost of goods sold, and gross margin as gross profit divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, primarily average selling prices, production and ordering volumes, change in mix of customers and products, third-party manufacturing costs and cost-reduction strategies. We expect our gross profit to increase in the foreseeable future as our revenue grows, though our gross margin may fluctuate from quarter to quarter due to changes in average selling prices as we introduce new products, and as we adopt new manufacturing processes and technologies.

Operating Expenses

Sales and Marketing

Sales and marketing expenses consist primarily of compensation for personnel, including salaries, bonuses, benefits, sales commissions and share-based compensation, related to selling and marketing functions, surgical instrument expense, physician education programs, training, shipping costs related to sending products to our sales representatives, travel expenses, marketing initiatives including our direct-to-patient outreach program and advertising, market research and analysis and conferences and trade shows. We expect sales and marketing expenses to continue to increase in absolute dollars in the foreseeable future as we continue to invest in our direct sales force and expand our marketing efforts, and as we continue to expand our sales and marketing infrastructure to both drive and support anticipated sales growth, though it may fluctuate from quarter to quarter.

Research and Development

Research and development ("R&D") expenses consist primarily of engineering, product development, clinical studies to develop and support our products, regulatory expenses, and other costs associated with products and technologies that are in development. These expenses include compensation for personnel, including salaries, bonuses, benefits and share-based compensation, supplies, consulting, prototyping, testing, materials, travel expenses, depreciation, and an allocation of facility overhead expenses. We expect R&D expenses to continue to increase in absolute dollars in the foreseeable future as we continue to hire personnel and invest in next-generation innovations of the Lapiplasty System and other products, though it may fluctuate from quarter to quarter due to a variety of factors, including the level and timing of our new product development efforts, as well as our clinical development, clinical studies, and other related activities.

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General and Administrative

General and administrative expenses consist primarily of compensation for personnel, including salaries, bonuses, benefits and share-based compensation, related to finance, information technology, legal and human resource functions, as well as professional services fees (including legal, audit and tax fees), insurance costs, general corporate expenses and allocated facilities-related expenses. We expect general and administrative expenses to continue to increase in absolute dollars in the foreseeable future as we hire personnel and expand our infrastructure to drive and support the anticipated growth in our organization.

Interest Income

Interest income consists of interest earned on our money market funds and marketable securities.

Interest Expense

Interest expense consists of interest incurred and amortization of debt discount and issuance costs related to outstanding borrowings.

Results of Operations

Comparison of the years ended December 31, 2023 and 2022

The following table summarizes our results of operations for the periods indicated ($ in thousands):

Year Ended December 31, Change

Operating expenses

Debt extinguishment loss — (4,483 ) 4,483 *

* Not meaningful

Revenue. Revenue increased by $45.3 million, or 31.9%, in the year ended December 31, 2023, as compared to 2022. The increase was partially driven by a 20% increase in the number of Lapiplasty Procedure kits sold in 2023 compared to 2022 as the result of an expanded surgeon customer base. The increase in the volume of Lapiplasty Procedure kits sold resulted in 50.9% of the revenue growth from 2022 to 2023. The remaining revenue growth was a result of increased adoption of our newer technologies and selling more products used in bunion cases resulting in a 10% increase in average blended revenue per Lapiplasty Procedure kit sold compared to the same period in 2022.

Cost of Goods Sold, Gross Profit and Gross Margin. Cost of goods sold increased by $9.6 million, or 37.8%, in the year ended December 31, 2023, as compared to 2022. The increase in cost of goods sold was primarily due to a $6.7 million increase in direct costs of goods sold and a $0.5 million increase in royalty expense both resulting from increased sales, $1.8 million increase in overhead expenses resulting from an increase in our headcount to support our growing business, and a $0.7 million increase in inventory provisions. Gross profit increased $35.6 million from the year ended December 31, 2023 as compared to 2022, primarily due to sales growth. Gross profit margin for the year end December 31, 2023 decreased from 82.0% to 81.2%, as compared to the same period in 2022, primarily due to changes in product mix, an increase in overhead, and an increase in inventory provisions, partially offset by lower royalty rates on newer products.

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Sales and Marketing Expenses. Sales and marketing expenses increased by $36.3 million, or 34.7%, in the year ended December 31, 2023, as compared to 2022. The increase in sales and marketing expenses was due to growth in our overall business. Sales and marketing expenses increased due to an increase of $15.7 million in payroll and related expenses from increased headcount of sales and marketing personnel, an increase of $11.6 million for higher commissions from increased sales by our employee sales representatives and independent sales agencies, $2.5 million in surgeon training and clinical-related expenses, an increase of $2.2 million in surgical instrument expense, an increase of $1.9 million primarily due to higher advertising fees for direct to consumer campaigns and sales meeting costs, an increase of $1.2 million in professional services related to marketing, an increase of $0.5 million in shipping costs due to increased sales, and an increase of $0.3 million in rent expense and occupancy costs related to moving into our new headquarters building in third quarter of 2022.

Research and Development Expenses. Research and development expenses increased by $1.9 million, or 13.7%, in the year ended December 31, 2023, as compared to 2022. The increase in research and development expenses was due to increases of $0.9 million in payroll and payroll-related costs resulting from increased headcount of research and development personnel, an increase of $0.6 million in product testing and validation, and an increase of $0.3 million in rent expense and occupancy costs related to moving into our new headquarters building in third quarter of 2022.

General and Administrative Expenses. General and administrative expenses increased by $14.0 million, or 42.5%, in the year ended December 31, 2023, as compared to 2022. The increase in general and administrative expenses was primarily due to an increase of $8.9 million in payroll and payroll-related costs from increased headcount to support our growing business, an increase of $4.2 million in professional services, primarily consisting of a $3.3 million increase in accrued compensation expense related to the milestone payments for our acquisition of RPM-3D in second quarter of 2023 and a $0.9 million increase in legal expenses, an increase of $0.7 million in rent expense and occupancy costs related to moving into our new headquarters building in third quarter of 2022, and a $0.5 million increase in amortization of finite-lived intangible assets from our acquisition of RPM-3D.

Interest Income. Interest income increased by $5.4 million in 2023 as compared to 2022. The increase in interest income was due to higher cash balances invested in marketable securities during 2023 due to our equity offering in the first quarter of 2023 and higher interest rates compared to 2022.

Interest Expense. Interest expense increased by $0.8 million, or 17.5%, from the year ended December 31, 2023 as compared to 2022. The increase in interest expense was due to a higher average debt balance in 2023 compared to 2022 and slightly higher interest rates on our outstanding debt in 2023 compared to 2022.

Debt Extinguishment Loss. Debt extinguishment loss decreased by $4.5 million, for the year ended December 31, 2023 as compared to the same period of 2022 due to our debt refinancing in 2022.

For the comparison of the results of operations for the years ended December 31, 2022 and 2021, refer to our Annual Report on Form 10-K, for the year ended December 31, 2022, as filed with the U.S Securities and Exchange Commission on March 8, 2023, in Part II Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Liquidity and Capital Resources

Overview

Before our IPO, our primary sources of capital were private placements of common stock and convertible preferred stock, debt financing agreements and revenue from the sale of our products. In April 2021, we received net proceeds of $107.6 million from our IPO. On February 10, 2023, we completed a follow-on public offering of 5,476,190 shares of our common stock, which included the exercise in full of the underwriters' option to purchase additional shares, at a price to the public of $21.00 per share. This offering resulted in net proceeds of approximately $107.5 million after deducting underwriting discounts and commissions of $6.9 million and offering expenses payable by us of approximately $0.6 million.

In April 2022, we entered into a five-year $150.0 million loan arrangement, initially consisting of up to $120.0 million in term loans over four tranches and up to $30.0 million in a revolving loan facility with entities affiliated with MidCap. As of December 31, 2023, we have $50.0 million under the term loan and $4.0 million under the revolving loan facility outstanding. As of December 31, 2023, tranche two ($30.0 million) of the term loan expired and is no longer available. Tranches three and four provide up to an additional $40.0 million in borrowing capacity in the aggregate, subject to the achievement of certain revenue targets.

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As of December 31, 2023, we had cash and cash equivalents of $13.0 million and marketable securities of $110.2 million available for sale, an accumulated deficit of $134.2 million and $54.0 million of principal outstanding under our term loan and revolving loan agreements. We believe that our existing cash and cash equivalents, marketable securities, available debt borrowings, and expected revenues will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months from the date of the issuance of these financial statements. We may be required or decide to raise additional financing to support further growth of our operations.

Funding Requirements

We use our cash to fund our operations, which primarily includes product costs as well as our sales and marketing and R&D expenses and related personnel costs. We expect our sales and marketing expenses to increase for the foreseeable future as we continue to invest in our direct sales force and expand our marketing efforts, and as we continue to expand our sales and marketing infrastructure to both drive and support anticipated sales growth. We also expect R&D expenses to increase for the foreseeable future as we continue to hire personnel and invest in next-generation innovations of our products. In addition, we expect our general and administrative expenses to increase for the foreseeable future as we hire personnel and expand our infrastructure to both drive and support the anticipated growth in our organization. We also incur and will continue to incur additional expenses as a result of operating as a public company. In the second quarter of 2023, funds were used for the acquisition of RPM-3D, and from time to time in the future, we may also consider additional investments in technologies, assets and businesses to expand or enhance our product offerings. The timing and amount of our operating and capital expenditures will depend on many factors, including:

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the scope and timing of our investment in our commercial infrastructure and sales force;

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the costs of our ongoing commercialization activities including product sales, marketing, manufacturing and distribution;

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the scope of our marketing efforts, including the degree to which we utilize direct to consumer campaigns;

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the degree and rate of market acceptance of the Lapiplasty System and our other products;

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the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, including enforcing our intellectual property rights against infringing products or technologies or enforcing contractual rights against parties breaching agreements with us;

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our need to implement additional infrastructure and internal systems;

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the research and development activities we intend to undertake in order to improve the Lapiplasty System and other products, to commercialize PSI technologies, and to develop or acquire additional products;

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the investments we make in acquiring other technologies, assets or businesses to expand our product portfolio;

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the success or emergence of new competing technologies or other adverse market developments;

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the effect of inflation, interest rate changes, and other general economic conditions on our operations and business;

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any product liability or other lawsuits related to our products;

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the expenses needed to attract and retain skilled personnel;

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the costs associated with being a public company; and

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the impact of any infectious disease outbreak on our business.

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Based upon our current operating plan, we believe that our existing cash, cash equivalents, marketable securities, and available debt borrowings will enable us to fund our operating expenses and capital expenditure requirements for at least the next twelve months. We have based this estimate on assumptions that may prove to be wrong or that may change in the future, and we could utilize our available capital resources sooner than we expect. We may seek to raise any necessary additional capital through public or private equity offerings or debt financings, credit or loan facilities or a combination of one or more of these or other funding sources. Additional funds may not be available to us on acceptable terms or at all. If we fail to obtain necessary capital when needed on acceptable terms, or at all, we could be forced to delay, limit, reduce or terminate our product development programs, commercialization efforts, sales and marketing initiatives, or other operations. If we raise additional funds by issuing equity securities, our stockholders will suffer dilution and the terms of any financing may adversely affect the rights of our stockholders. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. Debt financing, if available, is likely to involve restrictive covenants limiting our flexibility in conducting future business activities, and, in the event of insolvency, debt holders would be repaid before holders of our equity securities received any distribution of our corporate assets.

Cash Flows

The following table sets forth the primary sources and uses of cash and cash equivalents for the periods presented below (in thousands):

Year Ended December 31,

Net cash (used in) provided by:

Net Cash Used in Operating Activities

Net cash used in operating activities for the year ended December 31, 2023 was $34.6 million, consisting primarily of a net loss of $49.5 million and an increase in net operating assets of $9.7 million, which were partially offset by non-cash charges of $24.7 million. The non-cash charges consist primarily of share-based compensation expense of $17.4 million, depreciation and amortization expense of $5.4 million and non-cash lease expense of $2.5 million, offset by amortization and accretion of marketable securities of $1.4 million. The increase in net operating assets was primarily due to an increase of $9.8 million in inventories to meet demand for new products and safety stock, an increase of $9.3 million in accounts receivable due to sales growth in 2023, and an increase of $1.2 million in prepaid expenses and other assets (excluding unsettled securities transactions), which were partially offset by a $7.5 million increase to accrued liabilities and a $3.2 million increase to accounts payable due to timing of payments and growth of our operations. The increase of $7.5 million in accrued liabilities consisted of an increase of $4.2 million due to timing of payments, and an increase of $3.3 million due to increased accrued compensation expense related to our acquisition of RPM-3D in the second quarter 2023.

Net cash used in operating activities for the year ended December 31, 2022 was $30.6 million, consisting primarily of a net loss of $42.8 million and an increase in net operating assets of $5.8 million, which were partially offset by non-cash charges of $18.0 million. The increase in net operating assets was primarily due to an increase in accounts receivable resulting from higher sales revenue in 2022, higher inventories resulting from higher purchases in anticipation of growing demand in 2023 and to guard against supply chain risks, and an increase in prepaid expenses and other assets due to timing of payments, which were offset by increases in accounts payable and accrued liabilities due to timing of payments and growth of our operations. The non-cash charges primarily consisted of share-based compensation expense of $8.1 million, a loss on extinguishment of debt of $4.5 million, non-cash lease amortization of $2.5 million, depreciation and amortization expense of $2.1 million, and $0.4 million in provision for doubtful accounts primarily driven by higher account receivable balances at year end.

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Net cash used in operating activities for the year ended December 31, 2021 was $17.2 million, consisting primarily of a net loss of $20.6 million and an increase in net operating assets of $1.0 million, which were partially offset by non-cash charges of $4.3 million. The increase in net operating assets was primarily due to an increase in accounts receivable resulting from higher revenues in 2021, higher inventories resulting from higher purchases in anticipation of growing demand in 2022, and an increase in prepaid expenses and other assets due to timing of payments and growth of our operations, which were offset by increases in accounts payable and accrued liabilities due to timing of payments and growth of our operations. The non-cash charges primarily consisted of depreciation and amortization expense of $0.7 million, share-based compensation expense of $3.4 million, and amortization of debt issuance costs of $0.2 million.

Net Cash Used in Investing Activities

Net cash used in investing activities for the year ended December 31, 2023 was $81.3 million consisting of $169.9 million in purchases of marketable securities available for sale, $20.0 million for the acquisition of the RPM-3D assets, and $11.5 million in purchases of property and equipment, partially offset by $120.0 million in sales and maturities of marketable securities available for sale. The purchases of marketable securities were the result of cash invested from our public offering of common stock during the first quarter of 2023. The purchases of property and equipment consist of $5.0 million in purchases of capitalized surgical instruments for our reusable instrument trays driven by higher numbers of employee sales representatives and sales growth and $6.5 million of purchases of fixed assets and leasehold improvements primarily for our new corporate headquarters building.

Net cash used in investing activities for the year ended December 31, 2022 was $76.5 million consisting of $63.4 million in purchases of marketable securities available for sale, partially offset by $1.7 million in sales and maturities of marketable securities available for sale, and $14.8 million in purchases of property and equipment. The purchases of property and equipment consist of $5.1 million in purchases of capitalized surgical instruments for our reusable instrument trays driven by higher numbers of employee sales representatives and sales growth and $8.0 million of purchases of fixed assets and leasehold improvements primarily for our new corporate headquarters building.

Net cash used in investing activities for the year ended December 31, 2021 was $2.7 million, consisting of purchases of capitalized surgical instruments for our reusable instrument trays.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the year ended December 31, 2023 was $109.4 million, consisting of $107.5 million of net cash proceeds from our public offering of common stock in the first quarter of 2023 and $1.9 million from the exercise of stock options.

Net cash provided by financing activities for the year ended December 31, 2022 was $20.8 million, consisting of $53.5 million of net cash proceeds from the term loan agreement and revolving loan facility with MidCap and $2.2 million from the exercise of stock options, partially offset by the $33.9 million repayment of the CRG Group L.P. term loan and $1.0 million of third party debt issuance costs paid to related to the new MidCap borrowings.

Net cash provided by financing activities for the year ended December 31, 2021 was $107.7 million, consisting primarily of net proceeds from our IPO of $107.6 million and $1.8 million proceeds from exercise of stock options, partially offset by repayment of our Paycheck Protection Program loan of $1.8 million.

Surgeon Advisory Board Royalty Agreements

We recognized royalties expense of $6.9 million and $6.5 million for the years ended December 31, 2023 and 2022, respectively. For the years ended December 31, 2023 and 2022, the aggregate royalty rate was 3.7% and 4.6%, respectively. Each of the royalty agreements with our surgeon consultants prohibits the payment of royalties on products sold to entities and/or individuals with whom any of the surgeon advisors is affiliated.

Operating Lease

We have commitments for future payments related to our new corporate headquarters office located in Ponte Vedra, Florida. We entered into a 10-year lease in February 2022 for our new location which expires in July 2032. Lease payments comprise the base rent plus operating costs which includes taxes, insurance, and common area maintenance. We also have commitments for future payments related to our former headquarters which expire in April 2026. We have obtained subleases for this space. The remaining lease obligations are $25.7 million under these leases.

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Critical Accounting Policies and Estimates

Management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.

While our significant accounting policies are more fully described in Note 2, "Summary of Significant Accounting Policies," of the Notes to the Financial Statements included in this Annual Report, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our financial condition and our results of operations and require our most difficult, subjective and complex judgments.

Stock-Based Compensation

We account for stock-based compensation arrangements at fair value. We determine the fair value on the grant date for stock options using the Black-Scholes model and performance-based restricted stock unit ("PSU") awards using a Monte Carlo valuation model.

The fair value of these awards is recognized over the period during which an award holder is required to provide services in exchange for the award, known as the requisite service period, which is typically the vesting period using the straight-line method. Stock-based compensation expense is recorded net of estimated forfeitures in our Statements of Operations and are adjusted to actuals as they occur. The estimated forfeiture rate is based on historical analysis of actual forfeiture rates of similar awards.

The fair value of the stock options and PSUs are locked at grant date and will not fluctuate after grant date. However, the underlying inputs to the Black-Scholes option model and the Monte Carlo valuation model may change in the future for new grants which could impact the fair value of stock-based awards granted each year and could cause compensation expense to vary in future periods.

Goodwill and Other Intangible Assets

Our goodwill represents the excess of the cost over the fair value of net assets acquired. The determination of the value of goodwill and intangibles assets arising from acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of net tangible and intangible assets acquired. Goodwill is not amortized and is assessed for impairment using fair value measurement techniques on an annual basis or more frequently if facts and circumstances warrant such a review. Goodwill is considered to be impaired if we determine that the carrying value of our reporting unit exceeds its respective fair value.

We have a definite lived intangible technology asset that is reviewed for impairment upon triggering events that indicate the carrying value of the asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to future net undiscounted cash flows expected to be generated by the associated asset. If the asset's carrying value is determined to not be recoverable, the impairment to be recognized is measured by the amount by which the carry amount exceeds the fair market value of the intangible asset. Calculating cash flows for this measurement requires us to make significant estimates and assumptions related to forecasts of future revenues, expenses and discount rates. Changes in these assumptions could have a significant impact on the fair value of the technology intangible. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the assets. The calculation of the fair value of the intangible assets involves Level 3 fair value measurements. Any impairment recognized could significantly impact our results of operations in the period of impairment.

Recently Issued Accounting Pronouncements

For information regarding recent accounting pronouncements and their expected impact on our future results of operations and financial condition, refer to Note 3, "Recent Accounting Pronouncements," of the Notes to the Financial Statements.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We previously qualified as a "smaller reporting company," as defined in Rule 12b-2 under the Exchange Act, and have been permitted to rely, and have relied, on the reduced disclosure requirements available to smaller reporting companies, including not being required to provide the information required by this item pursuant to Item 305 of Regulation S-K. Our ability to rely on the reduced disclosure requirements available to smaller reporting companies will cease after the filing of this Annual Report and our definitive proxy statement related to our 2024 Annual Meeting of Stockholders (the "2024 Proxy Statement"), including those portions of the 2024 Proxy Statement that will be incorporated by reference into Part III of this Annual Report.

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Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248) 76

Balance Sheets 77

Statements of Operations and Comprehensive Loss 78

Statements of Stockholders' Equity 79

Statements of Cash Flows 80

Notes to Financial Statements 81

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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Treace Medical Concepts, Inc.

Opinion on the financial statements

We have audited the accompanying balance sheets of Treace Medical Concepts, Inc. (a Delaware corporation)(the "Company") as of December 31, 2023 and 2022, the related statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and financial statement schedules included under Item 15(a) (collectively referred to as the "financial statements"). In our opinion, thefinancial statements present fairly, in all material respects, the financial position of the Companyas of December 31, 2023 and 2022, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"), and our report dated February 27, 2024 expressed "an unqualified opinion".

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical audit matters

Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.

/s/ GRANT THORNTON LLP

We have served as the Company's auditor since 2018.

Jacksonville, FL

February 27, 2024

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TREACE MEDICAL CONCEPTS, INC.

Balance Sheets

(in thousands, except share and per share amounts)

December 31, December 31,

Assets

Current assets

Prepaid expenses and other current assets 7,853 3,624

Operating lease right-of-use assets 9,264 10,138

Other non-current assets 146 146

Liabilities and Stockholders’ Equity

Current liabilities

Operating lease liabilities, net of current portion 15,891 15,539

Other long-term liabilities 37 —

Commitments and contingencies (Note 8)

Stockholders’ equity

Accumulated other comprehensive (loss) income 163 (27 )

Total liabilities and stockholders’ equity $ 251,907 $ 159,024

The accompanying notes are an integral part of these financial statements.

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P TREACE MEDICAL CONCEPTS, INC.

Statements of Operations and Comprehensive Loss

(in thousands, except share and per share amounts)

Year Ended December 31,

Operating expenses

Debt extinguishment loss — (4,483 ) —

Other non-operating income (expense), net 1,901 (7,971 ) (4,042 )

Convertible preferred stock cumulative and undeclared dividends — — (196 )

Net loss attributable to common stockholders $ (49,527 ) $ (42,815 ) $ (20,748 )

Other comprehensive income (loss)

Unrealized gain (loss) on marketable securities 190 (27 ) —

The accompanying notes are an integral part of these financial statements.

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TREACE MEDICAL CONCEPTS, INC.

Statements of Stockholders' Equity

(in thousands, except share amounts)

Accumulated

Convertible Additional Other Total

Shares Amount Shares Amount Capital Deficit Loss Stock Equity

Issuance of restricted stock awards — — 24,895 — — — — — —

Share-based compensation expense — — — — 3,409 — — — 3,409

Share-based compensation expense — — — — 8,111 — — — 8,111

Share-based compensation expense — — — — 17,363 — — — 17,363

Unrealized loss on available-for-sale marketable securities — — — — — 190 — 190

Shares directly withheld from employees for tax payment — — — — — (13 ) (13 )

The accompanying notes are an integral part of these financial statements.

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TREACE MEDICAL CONCEPTS, INC.

Statements of Cash Flows

(in thousands)

Year Ended December 31,

Cash flows from operating activities

Adjustments to reconcile net loss to net cash used in operating activities

Provision for allowance for doubtful accounts 434 411 144

Amortization of debt issuance costs 297 244 176

Gain on fair value adjustment to derivative liability — (173 ) (72 )

Debt extinguishment loss — 4,483 —

Loss on impairment of long-lived assets — 346 —

Net changes in operating assets and liabilities, net of acquisitions:

Prepaid expenses and other assets (1,210 ) (668 ) (2,417 )

Other non-current assets — (146 ) —

Other, net 40 — —

Cash flows from investing activities

Purchases of available-for-sale marketable securities (169,865 ) (63,409 ) —

Sales and maturities of available-for-sale marketable securities 120,024 1,729 —

Acquisition, net of cash acquired (20,000 ) — —

Cash flows from financing activities

Proceeds from interest bearing term debt — 49,651 —

Proceeds from interest bearing revolving debt — 3,850 —

Debt issuance costs — (989 ) —

Payments on interest bearing debt — (33,893 ) —

Payments on PPP Loan — — (1,788 )

Proceeds from exercise of employee stock options 1,869 2,187 1,830

Taxes from withheld shares (13 ) — —

Supplemental disclosure of cash flow information:

Noncash investing activities:

Unrealized (gains) losses on marketable securities $ (190 ) $ 27 $ —

Unsettled matured marketable security and receivable from broker $ 3,000 $ — $ —

Noncash portion of internally developed software $ (11 ) $ — $ —

Noncash financing activities:

Issuance of common stock upon exercise of warrants $ — $ — $ 1

The accompanying notes are an integral part of these financial statements.

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1. Formation and Business of the Company

The Company

Treace Medical Concepts, LLC was formed on July 29, 2013, as a Florida limited liability company. Effective July 1, 2014, the entity converted to a Delaware corporation and changed its name to Treace Medical Concepts, Inc. (the "Company"). The Company is a medical technology company with the goal of advancing the standard of care for the surgical management of bunion and related midfoot deformities. The Company received 510(k) clearance for the Lapiplasty System in March 2015 and began selling its surgical medical devices in September 2015. The Company has pioneered the proprietary Lapiplasty 3D Bunion Correction System – a combination of instruments, implants and surgical methods designed to surgically correct all three planes of the bunion deformity and secure the unstable joint, addressing the root cause of the bunion. In addition, the Company offers advanced instrumentation and implants for use in other procedures performed in high frequency with bunion surgery. The Company operates from its corporate headquarters located in Ponte Vedra, Florida.

Initial Public Offering and Follow-on Offering

On April 27, 2021, the Company completed its initial public offering ("IPO"). The Company received net proceeds of approximately $107.6 million from the IPO. On February 10, 2023, the Company completed a follow-on offering of 5,476,190 shares of its common stock, which included the exercise in full of the underwriters' option to purchase additional shares, at a price to the public of $21.00 per share. The February 2023 offering resulted in net proceeds of $107.5 million after deducting underwriting discounts and commissions of $6.9 million and offering expenses payable by the Company of $0.6 million.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP").

The financial statements presented have been prepared on a consistent basis with the exception of the following item. An adjustment has been made to the Statement of Operations and Comprehensive Loss for the years ended 2022 and 2021 for $2.0 million and $0.9 million, respectively to reclassify surgical instrument expense from cost of goods sold to sales and marketing expense, to conform with the current year's presentation. This reclassification had no effect on the Company's net loss.

The Company evaluated events or transactions that may have occurred after the balance sheet date for potential recognition or disclosure through the date the financial statements were issued. No subsequent events or transactions requiring recognition or disclosure were identified.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.

Significant estimates and assumptions include write-downs related to accounts receivable, reserves and inventories, valuation of intangible assets and goodwill, the recoverability of long-term assets, deferred tax assets and related valuation allowances, contingencies, earn-out liabilities, and stock-based compensation.

Business Combinations

The Company allocates the purchase consideration to the identifiable assets and liabilities acquired, including intangible assets at fair value on the date of the acquisition. The excess of the fair value of the purchase consideration over the fair value of the identifiable assets and liabilities, if any, is recorded as goodwill. During the measurement period, which is up to one year from the acquisition date, the Company may adjust initial amounts that were recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date.

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Determining the fair value of assets acquired and liabilities assumed requires significant judgment, including the selection of valuation methodologies that may include the income approach, the cost approach, or the market approach. Significant assumptions used in those methodologies include the timing and amounts of cash flow projections, including revenue growth rates, obsolescence rates, margins, royalty rates, counterparty risk rates, and other discount rates.

Intangibles

Definite-life intangible assets are assessed for impairment upon triggering events that indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to future net undiscounted cash flows expected to be generated by the associated asset. If the asset's carrying value is determined to not be recoverable, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the intangible assets.

Goodwill

Goodwill represents the excess of the purchase price as compared to the fair value of net assets acquired and liabilities assumed. Goodwill is not amortized but is tested for impairment annually or when indications of impairment exist. The Company can elect to qualitatively assess goodwill for impairment if it is more likely than not that the fair value of a reporting unit exceeds its carrying value.

Impairment exists when the carrying amount, including goodwill, of the reporting unit exceeds its fair value, resulting in an impairment charge for this excess (not to exceed the carrying amount of the goodwill). The Company's annual impairment testing date is July 1. The impairment, if determined, is recorded within operating expenses in the Statements of Operations and Comprehensive Loss in the period the determination is made. There were no impairments recorded during the periods presented.

Contingent Consideration

Business combinations may include contingent consideration as part of the purchase price under which the Company will make future payments to the seller upon the achievement of certain milestones. The fair value of the contingent consideration is estimated as of the acquisition date at the present value of the expected contingent payments and is subsequently remeasured at each balance sheet date. The scenario-based model was used and relies on multiple outcomes to estimate the likelihood of future payout of the contingent consideration. The resulting earnout payout is then probability-weighted and discounted at an appropriate risk adjusted rate in order to arrive at the present value of the expected payment.

The Company reviews the probabilities of achievement of the earnout milestones to determine the impact on the fair value of the contingent consideration on a quarterly basis over the earn-out period. Actual results are compared to the estimates and probabilities of achievement used in its forecasts. The estimated fair value of the contingent consideration liability will increase or decrease, up to the contractual limit, as applicable. Changes in the estimated fair value of the contingent consideration are recorded in operating expenses in the Statement of Operations and Comprehensive Loss and are reflected in the period in which they are identified. Changes in the estimated fair value of the Company's contingent consideration may materially impact or cause volatility in its operating results.

Segments

The Company operates and manages its business as one operating and reportable segment, which is the business of designing, manufacturing, and marketing medical devices for physicians, surgeons, ambulatory surgery centers and hospitals related to the surgical management of bunion and related midfoot deformities. The Company's chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance. All long-lived assets are maintained in the United States.

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Cash and Cash Equivalents

The Company considers all highly liquid investments with an original or remaining maturity at the time of purchase of 90 days or less to be cash equivalents. All of the Company's cash equivalents have liquid markets and high credit ratings. The Company maintains its cash in money market funds and bank deposits, the balances of which at times may exceed federally insured limits.

Marketable Securities

The Company considers its debt securities and Yankee certificate of deposits ("Yankee CDs") to be available-for-sale securities. Available-for-sale securities are classified as cash equivalents or short-term marketable securities.

Marketable securities classified as available-for-sale are measured at fair value with temporary unrealized gains and losses reported in other comprehensive loss, and as a component of stockholders' equity (deficit) until their disposition or maturity. The Company reviews all available-for-sale securities at each period end to determine if they remain available-for-sale based on the Company's current intent and ability to sell the security if it is required to do so. Realized gains and losses from the sale of marketable securities, if any, are calculated using the specific-identification method. Premiums and discounts are amortized and accreted, respectively, using the effective interest method. Refer to Note 4, "Fair Value Measurements," for fair value disclosures for cash equivalents and short-term marketable securities.

Available-for-sale securities are subject to a periodic impairment review. The Company may recognize an impairment charge when a decline in the fair value of investments below the cost basis is determined to be other-than-temporary. In determining whether a decline in market value is other-than-temporary, various factors are considered, including the cause, duration of time and severity of the impairment, any adverse changes in the investees' financial condition and the Company's intent and ability to hold the security for a period of time sufficient to allow for an anticipated recovery in market value. Declines in fair value judged to be other-than-temporary are included in the Company's Statements of Operations and Comprehensive Loss. The Company did not record any other-than-temporary impairments related to marketable securities in the Company's Statements of Operations and Comprehensive Loss for the years ended December 31, 2023 or 2022.

Accounts Receivable and Allowances

Accounts receivable are generally from hospitals and ambulatory surgery centers and are stated at amounts billed less allowances for doubtful accounts. The Company continually monitors customer payments and maintains an allowance for losses resulting from a customer's inability to make required payments. The Company considers factors such as historical experience, credit quality, age of the accounts receivable balances, geographic related risks and economic conditions that may affect a customer's ability to pay. Accounts receivable are written off when individual balances are no longer collectible. As of December 31, 2023 and 2022, accounts receivable are presented net of an allowance for doubtful accounts of $1.0 million and $0.7 million, respectively. For the years ended December 31, 2023, 2022, and 2021, the Company recorded provisions for bad debts of $0.4 million, $0.4 million, and $0.1 million, respectively.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of risk consist principally of cash, cash equivalents, marketable securities, and accounts receivable. The Company maintains its cash with established financial institutions and, at times, such balances with any one financial institution may be in excess of the Federal Deposit Insurance Corporation ("FDIC") insured limits. The Company's available-for-sale securities portfolio primarily consists of U.S. treasury and agency securities, money market funds, commercial paper, Yankee CDs, high credit quality asset-backed securities and corporate debt securities. The Company's investment policy requires its available for sale securities to meet certain criteria including investment type, credit ratings, and a maximum portfolio duration of one year.

The Company earns revenue from the sale of its products to customers such as hospitals and ambulatory surgery centers. The Company's accounts receivable is derived from revenue earned from customers. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral from its customers. At December 31, 2023 and 2022, no customer accounted for more than 10% of accounts receivable. For the years ended December 31, 2023, 2022, and 2021, there were no customers that represented 10% or more of revenue.

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Leases

The Company determines whether an arrangement is or contains a lease at the inception of the arrangement and whether such a lease is classified as a financing lease or an operating lease at the commencement date of the lease. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The Company determines the commencement date of a lease to be the date on which a lessor makes an underlying asset available for use by the Company. Leases with a term greater than one year are recognized on the Balance Sheets as operating lease right-of-use assets, Operating lease liabilities and Operating lease liabilities, net of current portion. The Company elected not to recognize right-of-use assets and lease liabilities for leases with terms of 12 months or less (short-term leases). As the interest rates implicit in our lease contracts are not readily determinable, the Company utilizes its incremental borrowing rate based on the information available at the commencement date to determine the present value of lease payments. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid, incentives received, or impairment charges if the Company determines the right-of-use asset is impaired. In the fourth quarter of 2022, the Company recorded an impairment to the right-of-use asset associated with the lease on its previous corporate headquarters. See Note 6, "Balance Sheet Components," for further details of the impairment.

The Company considers the lease term to be the noncancelable period that the Company has the right to use the underlying asset, together with any periods where it is reasonably certain the Company will exercise an option to extend (or not terminate) the lease.

Rent expense for operating leases is recognized on a straight-line basis over the lease term and is presented in operating expenses on the Statements of Operations and Comprehensive Loss. The Company has elected to not separate lease and non-lease components for its real estate leases and instead accounts for each separate lease component and the non-lease components associated with that lease component as a single lease component. Variable lease payments are recognized as lease expense as incurred and are recorded in operating expenses on the Statements of Operations and Comprehensive Loss.

The Company has no finance leases.

Inventories

Inventories consist primarily of surgical kits and components as finished goods and are stated at the lower of cost or net realizable value. Cost is determined based on an average cost method which approximates the first-in, first-out basis and includes primarily outsourced manufacturing costs and direct manufacturing overhead costs. The Company reviews inventory for excess, obsolescence, and field losses and writes down inventory, as necessary. For the years ended December 31, 2023, 2022, and 2021, the Company recorded a provision to cost of goods sold of $0.9 million, $0.1 million, and $0.3 million, respectively, for excess, obsolete, and field related losses to inventory.

Property and Equipment, Net

Property and equipment are recorded at cost. Depreciation of property and equipment is recorded using the straight-line method over the following estimated useful lives as follows:

Years

Furniture, fixtures and equipment 7

Machinery and equipment 3 or 5

Capitalized surgical instruments 3

Computer equipment 3

Leasehold improvements Lesser of estimated useful life or lease term

Software 3

Long-lived assets are evaluated whenever a change in circumstances indicates that the carrying amount of an asset may not be recoverable. If assets are considered to be impaired, a charge is recorded for an amount that the carrying value exceeds the fair value. The Company capitalized $0.2 million of software development costs that will be depreciated over a period of three years.

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Revenue Recognition

The Company generates revenue from the sale of its proprietary Lapiplasty System and its minimally invasive variations, Adductoplasty System, Hammertoe PEEK Fixation System, SpeedPlate Implant Fixation Platform, single use osteotomes and release instruments, and other implanted ancillary products. The Company receives payment for all these products that are consumed during the surgery and does not receive separate consideration for the use of the instrument tray furnished by the Company for the surgeon's use. The Company identifies the instrument trays as a lease component and the implants and other single use products as a non-lease component in its arrangements with its customers. The Company concluded that the non-lease component is predominant, and as such, elected the practical expedient to not separate the lease and non-lease components. Therefore, the overall arrangement is accounted for under ASC 606.

Implant kits, single use instruments, and other ancillary products are sold in the United States through a combination of a direct employee sales force and independent sales agencies. The Company invoices hospitals and ambulatory surgery centers for the implant kits and other products and pays commissions to the sales representatives and independent sales agencies. The Company has no international sales.

Under ASC 606, revenue is recognized when the customer obtains control of promised goods or services, in an amount that reflects consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps as prescribed by ASC 606:

(i)

identify the contract(s) with a customer;

(ii)

identify the performance obligations in the contract;

(iii)

determine the transaction price;

(iv)

allocate the transaction price to the performance obligations in the contract; and

(v)

recognize revenue when (or as) the entity satisfies performance obligations.

A contract with a customer exists when (i) the Company enters into a legally enforceable contract with a customer that defines each party's rights regarding the products to be transferred and identifies the payment terms related to these products, (ii) the contract has commercial substance, and (iii) the Company determines that collection of substantially all consideration for its products that are transferred is probable based on the customer's intent and ability to pay the promised consideration. The Company considers signed agreements and purchase orders as a customer's contract. Sales prices are specified in either the customer contract or agreed price list, which is executed prior to the transfer of control to the customer.

The Company identifies performance obligations based on the terms of the contract and customary business practices, which include products that are distinct, or a series of distinct goods that are substantially the same and that have the same pattern of transfer to the customer. The transfer of the Company's products to the customer are distinct performance obligations. The Company does not have any material performance obligations other than the transfer of the products to the customer.

The transaction price in the Company's customer contracts includes fixed consideration to be contractually billed to the customer while variable consideration includes the right of return. The Company does not allocate the transaction price or any variable consideration to the right of return. The Company did not recognize a refund liability as of December 31, 2023 and 2022, and there were negligible returns during the years ended December 31, 2023 and 2022 and no product returns during the year ended December 31, 2021. The Company has elected to exclude from the measurement of the transaction price all taxes (e.g., sales, use, value-added) assessed by government authorities and collected from a customer.

For shipments to customers, the Company offers the right to return the product within 30 days for a full refund, and for returns between 30 and 90 days, the Company offers a full refund less a 15% restocking fee. The Company does not have a history of product returns for refund. Customer invoices are generally payable within 30 days. The Company's products are generally sold with a limited standard warranty to the original purchaser of the products against defects in workmanship and materials for 180 days. The Company's liability is limited to providing, at the Company's option, a full refund or credit of the purchase price, or repairing or replacing the product, provided that the customer returns the defective product within 180 days from the purchase date. To date, the Company has had negligible returns of any products alleged to be defective.

Revenue for products is recognized when a customer obtains control of the promised products, which is generally when the customer has the ability to (i) direct its use and (ii) obtain substantially all of the remaining benefits from it. Revenue recognition occurs for the majority of our sales when control of the product transfers to the customer, which is generally at the time the product is used in surgery. The Company also generates a small percentage of total revenues from the sale of

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products when the products are ordered in advance of a surgery procedure. The performance obligation is the delivery of the products and therefore, revenue is recognized either at shipment or upon receipt by the customer depending upon the contractual terms of the purchase and when the risk of ownership transfers to the customer.

Contract Costs

The Company applies the practical expedient to recognize the incremental costs of obtaining a contract as expense when incurred if the amortization period would be one year or less. These incremental costs include sales commissions paid to the Company's independent sales agencies or employee sales representatives.

Cost of Goods Sold

Cost of goods sold consists primarily of costs for the purchase of the Company's products from third-party manufacturers. Direct costs from the Company's third-party manufacturers include costs for raw materials plus the markup for the assembly of the components. Cost of goods sold also includes royalties, allocated overhead for indirect labor, certain direct costs such as those incurred for shipping our products and personnel costs. The Company expenses all inventory provisions for excess and obsolete inventories as cost of goods sold. The Company records adjustments to its inventory valuation for estimated excess, obsolete, field loss rate, and non-sellable inventories based on assumptions about future demand, past usage, changes to manufacturing processes and overall market conditions.

Research and Development Expenses

Research and development ("R&D") expenses consist primarily of engineering, product development, clinical studies to develop and support the Company's products, regulatory expenses, and other costs associated with products and technologies that are in development. These expenses include compensation for personnel, including salaries, bonuses, benefits and stock-basedcompensation, supplies, consulting, prototyping, testing, materials, travel expenses, depreciation and an allocation of facility overhead expenses.

Shipping and Handling

The Company has elected to account for shipping and handling activities as fulfillment activities. As such, the Company does not evaluate shipping and handling as promised services to its customers. The Company may bill customers for shipping and handling costs. Amounts billed for shipping and handling are included in revenue. Shipping and handling costs incurred by the Company are included in sales and marketing expense. Shipping and handling costs totaled $1.3 million, $0.8 million, and $0.5 million, for the years ended December 31, 2023, 2022, and 2021, respectively.

Advertising Costs

Advertising costs are expensed as incurred and are included as a component of marketing and sales expenses. Advertising expense includes the cost of advertising across the various mediums we employ, including print, digital, radio and television. Advertising costs totaled approximately $16.1 million, $15.0million, and $13.0 million, for the years ended December 31, 2023, 2022, and 2021, respectively.

Income Taxes

The Company accounts for income taxes under the liability method, whereby deferred tax assets and liabilities are determined based on the difference between the financial statements and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred tax assets when management estimates, based on available objective evidence, that it is more likely than not that the benefit will not be realized for the deferred tax assets.

The Company also follows the provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes. ASC 740-10, which prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken or expected to be taken on a tax return. No liability related to uncertain tax positions is recorded in the financial statements. It is the Company's policy to include penalties and interest expense related to income taxes as part of the provision for income taxes.

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Product Liability

The Company believes it carries adequate insurance for possible product liability claims. Accruals for product liability claims and legal defense costs in excess of insured amounts are recorded if it is probable that a liability has been incurred and the amount of any liability can be reasonably estimated. No accruals for product liability claims had been recorded as of December 31, 2023 and 2022.

Debt

Debt issuance costs and discount are amortized to interest expense using the effective interest method.

Stock-Based Compensation

The Company accounts for stock-based compensation arrangements with employees in accordance with ASC 718, Compensation-Stock Compensation, using a fair-value based method. The Company determines the fair value of stock options and performance-based restricted stock awards units ("PSUs") on the date of grant. The fair value for restricted stock and restricted stock units awards is the fair value of the stock at the grant date.

The fair value of time-based awards is recognized over the period during which an award holder is required to provide services in exchange for the award, known as the requisite service period, which is typically the vesting period using the straight-line method. The Company accrues for estimated forfeitures on share-based awards and adjusts stock-based compensation cost to actual as forfeitures occur. The estimated forfeitures are based on a historical analysis of actual forfeitures of awards.

The Company estimates the fair value of the stock-based awards using the Black-Scholes option-pricing model, which requires the input of highly subjective assumptions. The assumptions are as follows:

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Expected Term. The expected term represents the period that the stock options are expected to remain outstanding. The Company is using the "simplified" method, which is the simple average of the vesting period and the contractual term.

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Expected Volatility. The expected volatility is derived from the historical stock volatilities of comparable publicly listed peers over a period approximately equal to the expected term of the options as the Company does not have sufficient trading history to determine the volatility of its common stock.

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Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the stock-based awards' expected term.

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Expected Dividend Yield. The expected dividend yield is zero as the Company has not paid nor anticipates paying any dividends on the common stock in the foreseeable future.

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Fair Market Value of Common Stock. The fair market value of the common stock is based on its closing price as reported on the date of grant.

The Company continues to use judgment in evaluating the expected volatility and expected terms utilized for the fair value of stock options on a prospective basis. The Company used the simplified method to determine the expected term for options due to the lack employee exercise history since our IPO. As the Company continues to accumulate additional data, the Company may make refinements to the assumptions, which could materially impact the future stock-based compensation expense.

The Company estimates the fair value of PSUs awards using the Monte Carlo model, which requires the input of several assumptions. The assumptions are as follows:

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Beginning Average Stock Price. Includes the stock price for the Company and each peer company within the index for the measurement period prior to the grant date assuming dividends distributed during the period were reinvested for additional shares on the ex-dividend date.

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Valuation Date Stock Price. The closing price for the Company and each peer company on the grant date.

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Expected Volatility. The expected volatility is the historical stock volatilities for the Company and each peer company within the index over the period of time that is consistent with the measurement period for the awards.

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•

Correlation Coefficients. The correlation coefficients are derived from the price data used to calculate expected volatility and are used to model the way in which each entity's stock price tends to move in relation to the peer company group.

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Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant with maturities equal to the PSU awards performance period.

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Expected Dividend Yield For Modeling Total Stockholder Return. The total stockholder return for the Company and each peer company in the index is calculated assuming dividends distributed from the start of the measurement period are reinvested on the ex-dividend date in the underlying company's stock.

Comprehensive Loss

The Company is required to report all components of comprehensive loss, including net loss, in the financial statements in the period in which they are recognized. Comprehensive loss is defined as a change in equity of a business enterprise during a period, resulting from transactions and other events and circumstances from non-owner sources. Comprehensive loss equaled $49.3 million and 42.8 million for the years ended December 31, 2023 and 2022, respectively. Comprehensive loss equaled net loss for the year ended December 31, 2021.

Net Loss Per Share Attributable to Common Stockholders

Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, common stock options, unvested restricted stock units and restricted stock awards are considered to be potentially dilutive securities. Because the Company has reported a net loss for the years ended December 31, 2023, 2022, and 2021, diluted net losses per common share were the same as basic net losses per common share for these periods.

3. Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASC 842"). The update establishes principles for recognition, measurement, presentation, and disclosure intended to increase transparency and comparability for the accounting of lease transactions. The standard required lessees to recognize leases with terms greater than 12 months on the balance sheet and disclose key information about leasing arrangements. ASC 842 was effective for the Company for fiscal years beginning after December 15, 2021. The Company adopted the new standard as of January 1, 2022, using the required modified retrospective approach. Comparative periods were not adjusted and continue to be presented under the previous accounting guidance. The Company elected the package of practical expedients permitted under the ASC 842 transition guidance, which among other things, allowed it to carry forward the historical lease classification. The impact of adoption was the recognition of right-of-use assets and lease liabilities of $1.9 million for real estate operating leases at January 1, 2022. In addition, ASC 842 required new disclosures for lease transactions. Refer to Note 9, "Operating Leases," for new lease disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses. This guidance required financial instruments to be measured at amortized cost, and trade accounts receivable to be presented at the net amount expected to be collected. The new model requires an entity to estimate credit losses based on historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. In November 2019, the FASB issued ASU 2019-10, that was effective for fiscal years beginning after December 15, 2022, and interim periods within that fiscal year. The Company adopted the standard on January 1, 2023. The adoption of this guidance did not have a material impact on the Company's financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280)("ASC 280"). The update requires all public business entities to identify their reportable segments, including the basis of organization, types of products and services from which each reportable segment derives its revenues, and the title and position of the individual or the name of the group or committee identified as the chief operating decision maker ("CODM") and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate

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resources. Public entities shall disclose on an annual and interim basis for each reportable segment including entities that only have one reportable segment, certain significant expense categories and amounts that are regularly provided to the CODM and included in reported segment profit or loss. ASC 280 is applied retrospectively to all prior periods presented in the financial statements. This new guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of the new standard on its financial statements and related disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740)("ASC 740"). The update requires all public business entities on an annual basis to (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold and an explanation, if not otherwise evident, of the individual reconciling items disclosed, such as the nature, effect, and underlying causes of the reconciling items and the judgment used in categorizing the reconciling items. In addition, the update requires certain new disclosures of the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid is equal to or greater than five percent of total income taxes paid (net of refunds received). Other new disclosures required include income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. The new guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments are to be applied on a prospective basis, with retrospective application permitted. The Company is currently evaluating the impact of the new standard on its financial statements and related disclosures.

4. Fair Value Measurements

Assets and liabilities recorded at fair value in the financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels which are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

Level 3—Unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis – The following assets and liabilities are measured at fair valueon a recurring basis as of December 31, 2023 and December 31, 2022 (in thousands):

Level 1 Level 2 Level 3 Total

Assets:

Cash equivalents

Money market funds $ 3,160 $ — $ — $ 3,160

Short-term marketable securities at fair value

Liabilities:

Contingent consideration $ — $ — $ 2,977 $ 2,977

Total liabilities $ — $ — $ 2,977 $ 2,977

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Level 1 Level 2 Level 3 Total

Assets:

Cash and cash equivalents

Short-term marketable securities at fair value

The carrying amounts of the Company's money market funds classified as cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities, approximate their fair value due to the short-term nature of these assets and liabilities. Based on the borrowing rates currently available to the Company for debt with similar terms and consideration of default and credit risk, the carrying value of the term loan approximates their fair value.

The Company's available-for-sale securities portfolio consists of investments in U.S. treasury and government agency securities, commercial paper, corporate debt securities, asset-backed securities, and Yankee CDs. Yankee CDs are certificates of deposit issued in the United States by a branch of a foreign bank and are denominated in U.S. dollars. The fair value of Level 1 securities is determined on trade prices in active markets for identical assets. The fair value of Level 2 securities is determined using valuation models using inputs that are observable either directly or indirectly, such as quoted prices for similar assets, interest rates, yield curves, credit spreads, default rates, loss severity, broker and dealer quotes, as well as other relevant economic measures. The Level 3 contingent consideration was recorded at fair value on the date of the acquisition and thereafter based on the consideration expected to be transferred on the projected payment date estimated as the probability weighted future cash flows, discounted back to the present value. This calculation uses unobservable inputs that reflect the Company's own assumptions as to the ability of the acquired business to meet the targeted benchmarks and the discount rate used in the determination of fair value.

The following table sets forth a summary of the changes in the fair value of the Company's Level 3 financial instruments (in thousands):

Fair value as of December 31, 2022 $ -

Contingent consideration from acquisition 2,814

Change in fair value 163

Contingent consideration is included in other liabilities on the Balance Sheets. As of December 31, 2023, the entire balance is classified as current due to the timing of the expected payment. The change in fair value for the contingent consideration related to the technological advancements milestone payment is classified as research and development expense within the Statements of Operations and Comprehensive Loss. We made no cash payments for contingent consideration during the twelve months ended December 31, 2023. See Note 5, "Business Combination," for more information on the technological advancements milestone payment.

There were no assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2023 and December 31, 2022.

5. Business Combination

On June 12, 2023 (the "closing date"), the Company acquired certain assets of MIOS Marketing, LLC d/b/a RedPoint Medical3D ("RPM-3D"), a medical technology company offering pre-operative planning and patient-specific guides designed to deliver accurate surgical correction of deformities tailored to the patient's unique foot anatomy. RPM-3D's 22 patent applications further expand and reinforce the Company's global intellectual property portfolio covering technologies for the correction of bunion and related deformities.

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The Company paid $20.0 million in exchange for certain assets used in providing pre-operative planning and patient-specific guides for the surgical correction of foot and ankle deformities. The Company is obligated to make additional payments of up to $10.0 million in cash upon completion of certain milestones as follows: $3.5 million upon completion of certain transition services at 12 months from the closing date, $3.5 million upon completion of certain technological advancement milestones within 12 months of the closing date, and, subject to prior completion of the transition services and the technological advancement milestones, up to $3.0 million upon the issuance of certain patent claims. Payments made for the transition services and patent claims require satisfaction of such milestones, as well as the continued service of key individuals and are expensed over the service period of 12 months following the closing date. The milestone payment for technological advancements does not require continued service and is recorded as contingent consideration at fair value in other liabilities at December 31, 2023.

The following table summarizes the components of the acquisition-date fair value of consideration transferred (in thousands):

Contingent consideration 2,814

The following table summarizes the preliminary components of the acquisition-date fair value of assets acquired (in thousands):

Prepaid expenses and other current assets $ 19

Inventory 67

Property, plant and equipment 413

Intangible assets 9,500

Total identifiable assets acquired 9,999

Total assets acquired $ 22,814

Identified intangible assets consist of developed technology. The fair value was determined with the assistance of an external valuation specialist using an income approach, in accordance with ASC Topic 805 - Business Combinations. The developed technology is a finite-lived intangible asset with a useful life of ten years that is amortized on straight-line basis. There were no other material intangibles from the RPM-3D acquisition.

The purchase consideration was allocated to the identifiable net assets acquired based on estimated fair values at the date of the acquisition. The excess of the fair value of the purchase consideration over the fair value of the identifiable assets and liabilities was recorded as goodwill. The goodwill is attributable to the expected synergies with the Company's existing operations. The purchase price allocated to goodwill will be deductible for income tax purposes over a 15-year period.

The intangible assets balance as of December 31, 2023 consisted of the following (in thousands):

Gross Carrying Amount Accumulated Amortization Net Carrying Amount

The intangible amortization for the twelve months ended December 31, 2023 and 2022 was $0.5 million and $0, respectively.

Estimated intangible amortization expense as of December 31, 2023 for the next five years is as follows (in thousands):

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The goodwill balance as of December 31, 2023 is as follows (in thousands):

Balance as of December 31, 2022 $ -

No impairment charges for finite lived intangibles or goodwill were recorded in any of the periods presented.

There is no supplemental proforma presentation of operating results of the acquisition of the RPM-3D assets due to the immaterial impact on the Company's operations for the twelve months ended December 31, 2023 and 2022.

6. Balance Sheet Components

Cash and Cash Equivalents

The Company's cash and cash equivalents consisted of the following (in thousands):

December 31, December 31,

Cash equivalents:

Commercial paper — 323

Corporate debt — 2,197

Included in cash as of December 31, 2022 is $0.9 million pledged to Silicon Valley Bank ("SVB") as collateral for the Company's corporate credit card program and is restricted from use by the Company. During the twelve months ended December 31, 2023, $0.9 million of pledged cash was released by SVB.

Marketable Securities

The Company's available-for-sale marketable securities consisted of the following (in thousands):

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

Marketable securities - short-term

U.S. treasury and government agencies $ 29,377 $ 8 $ (16 ) $ 29,369

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

Marketable securities - short-term

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As of December 31, 2023, there were no available-for-sale securities with unrealized losses greater than 12 months. There was not an allowance for credit losses required as of December 31, 2023 and 2022.

As of December 31, 2023, the Company had no plans to sell securities with unrealized losses, and believes it is more likely than not that it would not be required to sell such securities before recovery of their amortized cost. As of December 31, 2023 and 2022, there were no material gains or losses from sales of available-for-sale securities.

As of December 31, 2023 and 2022, accrued interest of $1.1 million and $0.4 million, respectively, is excluded from the amortized cost basis of available-for-sale securities in the tables above and is recorded in prepaid expenses and other current assets on the Balance Sheets.

As of December 31, 2023 all marketable securities mature within two years, except for asset-backed securities. Asset-backed securities are not due at a single maturity date. As such, these securities were not included.

Property and Equipment, Net

The Company's property and equipment, net consisted of the following (in thousands):

December 31, December 31,

Furniture and fixtures, and equipment $ 2,494 $ 1,577

Less: accumulated depreciation and amortization (8,748 ) (4,263 )

Depreciation and amortization expense for property and equipment was $4.9 million, $2.1 million, and $0.7 million for the years ended December 31, 2023, 2022, and 2021, respectively.

In the fourth quarter of 2022, the Company recognized a $0.3 million impairment on a group of assets consisting of $0.2 million of property and equipment and $0.1 million related to the right-of-use asset associated with the lease of its previous corporate headquarters. The impairment loss is presented as a component of other income, net in the Statements of Operations and Comprehensive Loss. The Company did not record impairment charges for its property and equipment, net for the years ended December 31, 2023 and 2021.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

December 31, December 31,

Accrued royalties expense $ 2,305 $ 2,299

Accrued professional services 424 1,727

Accrued compensation expense for RPM-3D earn-out 3,340 —

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Other liabilities

Other liabilities consist of the following (in thousands):

December 31, December 31,

Current portion of operating lease liabilities $ 1,404 $ 339

Contingent consideration 2,977 —

Total other liabilities $ 4,432 $ 339

7. Long Term Debt

The Company's debt consisted of the following (in thousands):

December 31, December 31,

Revolving line of credit

MidCap revolving loan facility $ 4,000 $ 4,000

Term loans

Less: debt discount and issuance costs (992 ) (1,289 )

As of December 31, 2023, future payments of long-term debt were as follows (in thousands):

Fiscal Year

Total principal payments 54,000

Less: Unamortized debt discount and debt issuance costs (992 )

Total long-term debt, net $ 53,008

MidCap Loan and Revolving Loan Facility

On April 29, 2022, the Company entered into a five-year $150.0 million loan facility with entities affiliated with MidCap Financial Trust ("MidCap"), providing up to $120.0 million in term loans and a $30.0 million revolving loan facility.

The term loan facility provides for a 60-month term loan up to $120.0 million in borrowing capacity to the Company, over four tranches. At term loan closing, the Company drew $50.0 million under tranche one. At December 31, 2023, tranche two for $30.0 million expired. The remaining tranches provide up to an additional $40.0 million in borrowing capacity in the aggregate, subject to the achievement of certain revenue targets for the third and fourth tranche.

The revolving loan facility provides up to $30.0 million in borrowing capacity to the Company based on the borrowing base. The borrowing base is calculated based on certain accounts receivable and inventory assets. As of December 31, 2023, the borrowing base allows a total of $26.0 million available to the Company under the revolving loan facility. The balance drawn as of December 31, 2023 is $4.0 million under the revolving loan facility. The Company may request an increase in the revolving loan facility in an amount up to $20.0 million for a total commitment of up to $50.0 million. The Company is required to either (i) maintain a minimum drawn balance under the revolving loan facility or (ii) pay a minimum balance fee that is equal to the amount of the minimum balance deficit multiplied by the applicable interest rate during the period. If the outstanding balance under the revolving loan facility exceeds the lesser of (i) 50% of the revolving borrowing capacity or (ii) 50% of the borrowing base, or the Company is in default, MidCap will apply funds collected from the Company's lockbox account to reduce the outstanding balance of the revolving loan facility ("Lockbox Deductions"). As of December 31, 2023, the Company's borrowing level has not activated the Lockbox Deductions, nor is it expected to for the next 12 months; therefore, the Company has determined that the revolving loan balance is long-term debt.

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The loans bear interest at an annual rate based on a 30-day forward looking secured overnight financing rate plus 0.10% (subject to a floor of 1.0% and a cap of 3.0% for both loan agreements) plus (i) 6.0% under the term loan agreement and (ii) 4.0% under the revolving loan facility. Interest is payable monthly in arrears on the first day of each month and on the maturity of the loan agreements. The term loan agreement and the revolving loan facility are accruing interest as of December 31, 2023 at the capped interest rates of 9% and 7%, respectively. The Company is obligated to pay interest only for the first 48 months and straight-line amortization for the remaining 12 months, subject to the Company's election to extend the initial interest-only period by 12 months to 60 months total if the Company's trailing twelve-month revenue is at or above certain levels. If the term loan is repaid before the maturity date or the revolving loan facility is terminated before the end of its term, the prepayment fees are 3.0% of the amount repaid in the first year, 2.0% in the second year and 1.0% in the third year and thereafter, and a final payment fee of 3.0% of the amount borrowed is due under the term loan. The revolving loan facility prepayment fees are based on the revolving loan commitment amount.

The loans are secured by all of the Company's assets, including intellectual property. The loan agreements and other ancillary loan documents contain customary representations and warranties and affirmative and negative covenants. Under the loan agreements, the Company is not required to meet any minimum level of revenue if liquidity (defined as unrestricted cash plus undrawn availability under the revolving loan agreement) is greater than the outstanding balance under the term loan. If liquidity falls below such outstanding balance, then the Company is subject to a minimum trailing twelve-month revenue covenant. The Company is not subject to this covenant at December 31, 2023.

During the years ended December 31, 2023, 2022, and 2021, the Company recognized $5.2 million, $4.4 million, and $4.1 million, respectively, in interest expense related to debt agreements. During the years ended December 31, 2023, 2022, and 2021 amortization of the debt discount was $0.3 million, $0.2 million, and $0.2 million.

8. Commitments and Contingencies

License and Royalty Commitments

The Company has entered into product development and fee for service agreements with members of its Surgeon Advisory Board and other surgeon consultants that specify the terms under which the consultant is compensated for his or her consulting services and grants the Company rights to the intellectual property created by the consultant in the course of such services. As products are commercialized with the assistance of members of the Surgeon Advisory Board and other surgeon consultants, the Company may agree to enter into a royalty agreement if the consultant's contributions to the product are novel, significant and innovative.

As of December 31, 2023 and 2022, the Company has royalty agreements with certain members of its Surgeon Advisory Board and other surgeon consultants providing for royalties based on each individual's level of contribution. Each royalty agreement: (i) confirms the irrevocable transfer to the Company of all pertinent intellectual property rights; (ii) sets the applicable royalty rate; (iii) sets the period of time during which royalties are payable; (iv) is for a term of three years, renewable by the parties, and may be terminated by either party on 90 days' notice for convenience (provided that if terminated by the Company for convenience the obligation to pay royalties is not affected); and (v) prohibits the payment of royalties on products sold to entities and/or individuals with whom the surgeon advisor or any other surgeon advisor entitled to royalties is affiliated. Each of the royalty agreements may be subsequently amended to add the license of additional intellectual property covering new products, and as a result, multiple royalty rates and duration of royalty payments may be included in one royalty agreement.

As of December 31, 2023 and 2022, the Company's royalty agreements provide for (i) royalty payments for 10 years from first commercial sale of the relevant product and (ii) a royalty rate for each such agreement ranging from 0.4% to 3.0% of net sales for the particular product to which the surgeon contributed.

The Company recognized royalties expense of $6.9 million, $6.5 million, and $4.3 million for the years ended December 31, 2023, 2022, and 2021, respectively, resulting in an aggregate royalty rate of 3.7%, 4.6%, and4.6%, for the years ended December 31, 2023, 2022, and 2021, respectively.

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Contingencies

From time to time, the Company may be a party to various litigation claims in the normal course of business. Legal fees and other costs associated with such actions are expensed as incurred. The Company assesses, in conjunction with legal counsel, the need to record a liability for litigation and contingencies. Accrual estimates are recorded when and if it is determinable that such a liability for litigation and contingencies are both probable and reasonably estimable. There were no accrued liabilities related to litigation and contingencies as of December 31, 2023 and 2022.

9. Operating Leases

The Company's leases consist of real estate leases in Ponte Vedra, Florida.

On February 9, 2022, the Company entered into a 10-year operating lease for a new corporate headquarters building in Ponte Vedra, Florida, with a lease commencement date of March 1, 2022. The Company's obligation to make cash payments for the new headquarters building started in the third quarter of 2022.

The Company's leases contain options to renew, none of which the Company is reasonably certain to exercise. The lease agreements do not contain any residual value guarantees or restrictive covenants. For the new headquarters lease, the Company is provided a tenant improvement allowance for the construction of leasehold improvements, of which $2.0 million is remaining as of December 31, 2023. In exchange for construction management and supervision services related to these improvements, the Company paid the lessor a fee equal to one and a half percent (1.5%) of total construction costs.

In addition to base rent, the Company pays variable costs related to its share of operating expenses under certain of its lease arrangements. These variable costs are recorded as lease expense as incurred and presented as operating expenses in the Statements of Operations and Comprehensive Loss. Variable lease costs were $0.7 million, $0.2 million, and $0 for the twelve months ended December 31, 2023, 2022, and 2021, respectively.

Rent expense was $0.6 for the twelve months ended December 31, 2021.

Operating lease cost was $2.4million and $2.3 million for the twelve months ended December 31, 2023 and 2022, respectively. During the twelve months ended December 31, 2023, cash paid for amounts included in operating lease liabilities of $2.2 million was included in cash flows from operating activities on the Statements of Cash Flows.

Additional information related to operating leases is as follows:

Weighted average remaining lease term (years) 8.2

Weighted average discount rate 9.2 %

The following table summarizes a maturity analysis of operating lease liabilities showing the aggregate lease payments as of December 31, 2023 (in thousands):

Fiscal Year

Total undiscounted lease payments 25,737

Less: imputed interest (8,442 )

Total discounted lease payments 17,295

Less: Current portion of lease liability (1,404 )

Noncurrent portion of lease liability $ 15,891

* Amount presented is net of allowance for tenant improvements.

In 2023, the Company entered into subleases for a portion of its former headquarter space as a lessor. The lease is classified as an operating lease. The Company recorded rental income of $0.3 million for years ended December 31, 2023.

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10. Income Taxes

The Company has not recorded an income tax provision for years ended December 31, 2023, 2022, and 2021 due to its operating losses. All losses before income taxes were generated in the United States.

Reconciliation of the statutory federal income tax to the Company's effective tax is as follows:

December 31,

Income tax at the statutory rate (21 )% (21 )% (21 )%

Stock-based and other compensation (1 ) (5 ) (8 )

State taxes, net of federal benefit (3 ) (1 ) (6 )

Research and development credits (1 ) (1 ) (1 )

Change in valuation allowance 25 26 32

Effective tax rate 0 % 0 % 0 %

The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and deferred tax liabilities were as follows (in thousands):

December 31,

Deferred income tax assets

Stock-based compensation expense 3,538 1,590

Research and development expenses 2,368 1,032

Research and development credits 1,273 954

Deferred income tax liabilities

Property and equipment $ (1,573 ) $ (1,537 )

Operating lease right-of-use assets (2,217 ) (2,331 )

Gross deferred income tax liabilities (3,818 ) (3,897 )

Net deferred tax liabilities $ — $ —

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax assets, projected future taxable income, and tax planning strategies in making this assessment. Due to the Company's history of net losses, the deferred tax assets have been fully offset by a full valuation allowance of $35.2 million and $22.9 million as of December 31, 2023 and December 31, 2022, respectively. The Company's changes in the deferred tax asset valuation allowance for the years ended December 31, 2023 and 2022, were $12.3 million and $10.9 million, respectively.

The Company had unused federal and state net operating loss carryforwards of approximately $99.6 million and $53.0 million, respectively as of December 31, 2023, and federal and state net operating loss carryforwards of approximately $71.2 million and $34.0 million, respectively, as of December 31, 2022. The net operating loss carryforwards begin to expire in 2034. The Company's research and development tax credit carryforwards were $1.3 million and $1.0million as of December 31, 2023 and 2022, respectively, and begin to expire in 2037.

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The federal and state net operating loss carryforwards and credits may be subject to significant limitations under Section 382 and Section 383 of the Internal Revenue Code and similar provisions under state law. The Tax Reform Act contains provisions that limit the federal net operating loss carryforwards that may be used in any given year in the event of special occurrences, including significant ownership changes. A Section 382 "ownership change" generally occurs if one or more stockholders or groups of stockholders, who own at least 5% of the Company's stock, increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. The Company may have previously experienced, and may in the future experience, one or more Section 382 "ownership changes," including in connection with the Company's initial public offering. If so, the Company may lose some or all of the tax benefits of its carryforwards and credits.

Management has reviewed and evaluated the relevant technical merits of each of its tax positions in accordance with accounting principles generally accepted in the United States of America for accounting for uncertainty in income taxes and determined that there are no uncertain tax positions that would have a material impact on the financial statements of the Company. The Company is not subject to U.S. Federal and state income tax examinations by tax authorities for tax years before 2017.

11. Stockholders' Equity

Preferred Stock

The Company is authorized to issue 5,000,000 shares of preferred stock. As of December 31, 2023, and December 31, 2022, no shares of preferred stock were outstanding.

Common Stock

On April 27, 2021, the Company amended and restated its Certificate of Incorporation, which became effective upon the closing of the IPO. The Company is authorized to issue 300,000,000 shares of common stock.

Shares Reserved for Future Issuance

The Company has reserved shares of common stock for future issuances as follows:

December 31,

Common stock available for Employee Stock Purchase Plan 1,602,719 1,046,437

Share-based Incentive Plans

In April 2021, prior to the IPO closing, the Company's board of directors and stockholders approved the 2021 Incentive Award Plan ("2021 Plan"), which became effective upon the IPO closing. The Company initially reserved 5,046,278 shares of common stock for issuance of share-based compensation awards, including stock options, restricted stock ("RSA"), restricted stock units ("RSU") and other stock-based awards. The number of shares initially reserved for issuance or transfer pursuant to awards under the 2021 Plan will be increased by (i) the number of shares represented by awards outstanding under the Company's 2014 Stock Option Plan ("2014 Plan") and collectively with the 2021 Plan, the "Stock Plans") that become available for issuance under the terms of the 2021 Plan and (ii) an annual increase on the first day of each fiscal year beginning in 2022 and ending in 2031, equal to the lesser of (i) 5.0% of the shares of stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (ii) such smaller number of shares of stock as determined by the Company's board of directors; provided, however, that no more than 37,847,090 shares of stock may be issued upon the exercise of incentive stock options.

Prior to the IPO, the Company was authorized to issue stock purchase rights and to grant options to purchase Class A common stock to employees, directors, and consultants under the 2014 Plan. Stock options under the 2014 Plan have a term of no more than ten years from the date of grant and vest in equal installments over a maximum of five years. No future awards can be granted under the 2014 Plan. The shares underlying outstanding and unexercised options granted to employees, directors and consultants under the 2014 Plan may become available for issuance under the 2021 Plan as follows:

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(i) to the extent that such an option award terminates, expires or lapses for any reason or is settled in cash without the delivery of shares, any shares subject to the award at such time will be available for future grants under the 2021 Plan; (ii) to the extent shares are tendered or withheld to satisfy the grant, exercise price or tax withholding obligation with respect to any award under the 2014 Plan, such tendered or withheld shares will be available for future grants under the 2021 Plan; and (iii) to the extent that the Company repurchases the shares prior to vesting so that shares are returned to the Company, such shares will be available for future grants under the 2021 Plan.

At December 31, 2023, 4,635,615 shares of common stock remain available for issuance as awards under the 2021 Plan. In January 2024, the number of shares of common stock available for issuance under the 2021 Plan was increased by 3,087,482 shares as a result of the automatic increase provision in the 2021 Plan.

Stock Options

Options under the 2021 Plan may be granted for periods of up to 10 years at exercise prices no less than the fair market value of the Company's common stock on the date of grant; provided, however, that the exercise price of an incentive stock option granted to a 10% stockholder may not be less than 110% of the fair market value of the shares on the date of grant and such option may not be exercisable after the expiration of five years from the date of grant. Stock options granted vest ratably over four years.

The Company uses the Black-Scholes option pricing model to determine the fair value of stock options at the grant dates with the following assumptions for options granted during 2023, 2022, and 2021 fiscal years:

December 31,

Stock option activity for 2023 under the Stock Plans is set forth below:

The aggregate intrinsic value of options exercised during the years ended December 31, 2023, 2022, and 2021 was $8.3 million, $25.9 million, and $39.1 million, respectively.

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Restricted Stock Units and Awards

Full value award activity for 2023 under the Stock Plans is set forth below:

Full Value Awards

RSUs and RSAs granted under the 2021 Plan generally vest annually over 4 years in equal installments.

Performance Share Units

The Company granted performance-based restricted stock unit ("PSU") awards in the third quarter of 2023 subject to market and service vesting conditions to certain executives under the Company's 2021 Plan. The actual number of PSUs that will vest at the end of the measurement period is determined based on the Company's total stockholder return ("TSR") ranking relative to the TSR of a published index of the Company's peers. The measurement period is two years. The grant date value of each target PSU award was determined using a Monte Carlo valuation model. If the service vesting conditions are met, the actual number of PSUs earned may vary from zero, if performance thresholds are not met, to as much as 250% of target PSUs.

The table below summarizes the assumptions used to estimate the grant date fair value of the PSUs granted:

Year Ended December 31,

Weighted average expected volatility of common stock 61.12%

Expected volatility of peer index 21.61% to 95.93%

Correlation coefficient of peer index 0.08 to 1

Weighted average risk-free interest rate 4.76%

Dividend yield 0%

PSU activity for 2023 under the Stock Plans is set forth below:

Number of Shares Weighted Average Granted Date Fair Value

Unvested as of December 31, 2022 - $ -

Vested - -

Canceled or forfeited - -

Share-Based Compensation Expense

Stock-based compensation expense is reflected in the Statements of Operations and Comprehensive Loss as follows (in thousands):

Year Ended December 31,

Cost of goods sold $ 228 $ — $ —

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The weighted-average grant date fair values of the stock options granted were $12.75, $7.52, and $6.19 per share for the years ended December 31, 2023, 2022, and 2021, respectively. The total grant date fair value of shares vested during the years ended December 31, 2023, 2022, and 2021 were $10.1 million, $5.3 million, and $2.0 million, respectively.